Outsourcing means hiring external labor rather than using internal employees. It occurs on a regular basis when a company needs a highly specialized task performed and, rather than training its own employees, contracts the services of a company that focuses on this task as a core competency. Outsourcing happens for one reason: it saves a company money. This savings can take the form of reduced logistical complexity in a company’s operations and administration, productivity gains that come from utilizing highly specialized labor or the availability of cheaper labor than is obtainable from a company’s own workforce.

Foreign and Domestic Outsourcing

The media and most people equate outsourcing with the transfer of American jobs overseas, where foreign workers perform the same labor for less pay due to poorer material living conditions and a dearth of labor unions. However, companies also routinely outsource jobs domestically to other American companies or individuals. For instance, a tech company that wants to make a major upgrade to its corporate networks might hire specialized IT contractors rather than using its own engineers, who may lack the time or talent to undertake such a project efficiently. Notably, companies also frequently outsource labor by replacing their employees with independent contractors. Sometimes these contractors work in the same buildings as full employees, and thus the jobs might not appear to move “out” at all, but, as with any other form of outsourcing, a company has a much lower obligation to its contractors than to its full employees.

Foreign Outsourced Jobs

A company can outsource any job that does not require work to be performed inside the country. This includes most private-sector jobs. In practice, according to figures from the Bureau of Labor Statistics, some of the jobs that most often get outsourced to foreign countries include computer programming, manufacturing, telephone customer service, data entry, telemarketing and many types of sales and technician jobs.

Unemployment and Domestic Outsourcing

Domestic outsourcing has a complicated effect on the American economy. On the surface, it might seem like a zero-sum phenomenon, as a lost job at one company gets canceled out by the same job at another company. However, according to economics professor Harry Cleaver at the University of Texas, any domestic outsourcing that results in lower wages and benefits may or may not result in price savings to that company’s customers, but it always has a negative impact on domestic consumption, because the replacement workers earn less and the replaced workers find themselves out-priced in their field. Thus, on the whole, this kind of outsourcing has an overall depressing effect on economic growth, which contributes to unemployment in the aggregate. Only jobs that get outsourced to higher-quality workers have an unambiguously positive economic effect.

Unemployment and Foreign Outsourcing

Foreign outsourcing directly contributes to unemployment in the United States. In these instances, an outsourced job doesn’t get replaced by anything. The work has moved to another country. Meanwhile, these unemployed workers find themselves hard-pressed to get work in their field, because other companies are following suit and outsourcing. Many must take lower-paying jobs instead, which has the same depressing effect on domestic consumption described previously. According to Nobel Prize laureate and economist Paul Samuelson, the companies who carry out the foreign outsourcing do make more money by realizing labor cost savings, but instead of passing these savings along to customers they keep a considerable portion of the money for their executives and shareholders, contributing to income inequality and erosion in the middle class -- in addition to the direct unemployment.

About the Author

Josh Fredman is a freelance pen-for-hire and Web developer living in Seattle. He attended the University of Washington, studying engineering, and worked in logistics, health care and newspapers before deciding to go to work for himself.